My Core Holdings: Should You Care?
Talking to a good financial advisor can be annoying, because the (correct) answer to almost any question posed to them is, “It depends.”
That feels like a non-answer, but it truly does depend, because what is advisable depends greatly on one’s personal preferences, financial goals, risk tolerance, and so on. That’s why the correct answer to so many financial and investment questions is the same:
- Should I buy Tesla (TSLA) stock? It depends.
- Should I have an allocation to Bitcoin in my portfolio? It depends.
- Should I have an allocation to gold in my portfolio? It depends.
- Should I have a 40% allocation to bonds? It depends.
- Should I have a heavier weighting to growth or value stocks? It depends.
- Should I emphasize high-yield or low-yield stocks? It depends.
That quickly gets frustrating, doesn’t it? But it’s true. Investment decisions should be different for, say, a 70-year-old with a modest nest egg and a few grandchildren he/she would like to help put through college… than for a 25-year-old with a good job but little in savings and a desire to buy a home at some point.
So, with that in mind, should you care what my top ten stock holdings are?
The answer is (say it with me): It depends.
First, you should know that I’m a married, childless 31-year-old who has been extraordinarily fortunate in life thus far. Perhaps not sip-cocktails-on-the-beach-for-the-rest-of-my-life kind of fortunate, but certainly more fortunate than most in that I have above-average investable savings for someone my age.
Second, you should know that I’m a fairly risk-averse investor who prefers steadiness and predictability in my investments over massive upside. Of course, my primary investment goal is to prevent permanent loss of capital. That probably goes without saying. But just below that priority is the goal of steady compounding without suffering any big losses from which it would take many years to recover.
Third, you should know I’m a dividend growth investor, and my portfolio’s primary orientation is around creating a steadily growing passive income stream. All of my stock and ETF holdings pay a dividend or distribution. Every single one. Dividend yields range from 1.9% to 12.3%, but the “sweet spot” for me is a yield range between 3% and 5%.
Do these traits (above-average investable savings, fairly risk-averse, dividend growth) resonate with you? If so, maybe you should care what my top ten holdings are.
Some Notes On Core Holdings
Then again, there are a great many more factors to consider than just the above three, not least of which is the core insight from Peter Lynch. He advised investors to use whatever special knowledge they have to narrow their search for good stocks to buy. Following Lynch’s advice would result in each person’s portfolio having a certain tilt toward the industry knowledge or set of interests unique to that person.
As you’ll see below, my own core holdings have a heavy weighting in net lease real estate investment trusts (“REITs”), because I have worked at a private net lease real estate investment company and have a particular understanding of that business model.
In “It’s Time To Build Core Holdings In These Blue Chip Dividend Stocks,” I talked about what exactly makes for a “core holding.”
Here are the five criteria mentioned in that article that I use to determine core holdings:
- My personal level of understanding in the company/business model
- Management’s competence and shareholder-alignment
- Cost of capital advantage
- Quality of balance sheet
- Projected growth rate
I mostly don’t invest in companies with enduring competitive advantages or “moats” in the Warren Buffett sense.
- Utilities have legal monopolies over certain regions, but they also have state-regulated returns.
- REITs can certainly enjoy advantages over peers but are still subject to changes in cost of capital from interest rate and stock price movements.
- Consumer staples companies can have brand strength, but they don’t have the kind of customer loyalty that would overpower price, product innovation, and other factors.
- Pharmaceutical companies sometimes enjoy significant patent protection, but the ones I own tend to have big patent cliffs looming in the near future.
- Midstream energy companies perhaps come closest to moats with FERC regulation of interstate pipelines and the difficulty of delivering new projects, but there is still enough competition to temper pricing.
In lieu of a traditional moat ala railroads, smartphones, operating systems and bookkeeping software that everyone uses, etc., I focus more heavily on the competitive advantages that come from quality management teams, strong balance sheets, below-average costs of capital, and above-average projected growth rates.
My Top Ten
Enough prelude! Let’s get to the top ten already.
Keep in mind that the weighting percentages shown below are based on the total dollar value of my brokerage account, which includes cash reserves that make up 1.1% of the account and long-term bonds that make up 2.9%. Other than that, the portfolio is entirely in individual stocks and equity ETFs, which make the percentage weightings a mostly accurate portrayal of their position size.
Do I wish I had more cash during a bear market? Certainly. But the total portfolio has an average dividend yield of 4.3%, so at least I’m getting regular cash infusions to reinvest.
As for the long-term bonds, they are meant to act as portfolio insurance, as they have historically gone up when stocks are selling off. A lot of good my “portfolio insurance” has done me so far this year in the face of high inflation (as some commenters on the above-linked article have repeatedly reminded me). But I don’t think this level of inflation will persist for much longer, so I expect long-term bonds to return to their typical role as the safe haven during stock selloffs going forward.
How are we still not to the top ten? Alright, here they are:
|Rank||Company||Weighting||Div Yield||Est. Forward Div Growth Rate|
|1.||Agree Realty Corporation (ADC)||4.6%||4.1%||6%|
W. P. Carey Inc. (WPC)
|3.||Realty Income (O)||3.2%||4.4%||3%|
|4.||VICI Properties (VICI)||3.2%||4.7%||5%|
|5.||Enterprise Products Partners (EPD)||2.9%||6.7%||3%|
|6.||NextEra Energy Partners (NEP)||2.2%||4.0%||12%|
|7.||Clearway Energy Inc. (CWEN, CWEN.A)||2.0%||4.4%||7%|
|8.||National Retail Properties (NNN)||1.9%||4.8%||2%|
|9.||Federal Realty Investment Trust (FRT)||1.8%||3.7%||3%|
|10.||Crown Castle International (CCI)||1.7%||3.1%||9%|
|Total / Weighted Average||27.9%||4.6%||4.9%|
1. Agree Realty. I explained in detail why I’ve given ADC the largest weighting in my portfolio in “Why Agree Realty Is My Largest Holding.”
In short, I’ve found no better combination of yield, growth, and defensiveness on the public markets. CEO Joey Agree, son of the company founder and a sharp mind in his own right, has done a phenomenal job of expanding the REIT from small-cap to mid-cap while creating a platform for continuous, rapid growth. And, somewhat surprisingly, as ADC’s external growth has ramped up, its portfolio quality (at least in terms of tenant credit) has only improved. Two-thirds of rent derives from investment grade tenants, led by Walmart (WMT) as ADC’s top tenant at nearly 7% of total rent.
2. W. P. Carey. WPC makes a great companion stock to ADC, in my estimation, for a few reasons: (1) 50% of WPC’s portfolio is in industrial properties, while ADC is fully in retail; (2) WPC’s largely CPI-based rent escalators rendering 2-3% organic rent growth compare favorably to ADC’s 1% average annual rent escalation; (3) WPC largely acquires properties via sale-leasebacks, while ADC mostly acquires existing leases with no ability to negotiate terms; and (4) WPC has nearly 40% of its portfolio invested in high-quality retail and office properties in Europe, while ADC is solely in the US.
3. Realty Income. Dividend Aristocrat and Monthly Dividend Company O has followed the same model of collecting net leased properties at an attractive spread over its cost of capital for decades, and the model continues to work. That said, while I’m not selling, I don’t expect dividend growth to average any more than the low single-digits going forward because of O’s gargantuan size.
4. VICI Properties. Catapulted into my top 5 holdings because of my previous position in MGM Growth Properties (MGP), which VICI recently acquired, the landlord of Las Vegas has a lot going for it. Its leases are decades long, its properties are iconic and irreplaceable, and its annual rent escalations are 2%+, with many escalators tied to the CPI. That said, after billions of dollars of acquisitions recently, I expect dividend growth to slow from the high single-digits to the mid-single-digits.
5. Enterprise Products Partners. This midstream energy giant is probably the most conservatively run in its space. Insiders, including and especially scions of the founding Duncan family, own about one-third of the company, and they are relentlessly focused on creating shareholder value through oil & gas. That focus is serving the company well in this environment.
6. NextEra Energy Partners. NEP’s special relationship with parent company NextEra Energy, Inc. (NEE) gives the renewable energy yieldco unrivaled access to high-quality, stabilized wind and solar assets. NextEra Energy Resources, a subsidiary of NEE, is one of the world’s largest developers of renewable power production assets, and many of these assets end up getting sold, or “dropped down,” to NEP. That has been the primary fuel of NEP’s double-digit dividend growth.
7. Clearway Energy Inc. CWEN has substantially the same business model as NEP, with Clearway Energy Group as its sponsor/renewable energy developer. But recently, CWEN has become even more attractive after French oil supermajor TotalEnergies (TTE) bought a 50% stake in Clearway Energy Group, which should significantly expand the number of renewable energy investment opportunities available to CWEN.
8. National Retail Properties. Along with O, NNN is one of my longest running individual stock investments. The net lease REIT invests in retail properties leased to middle-market, non-investment grade tenants. It has the highest quality portfolio of the net lease REITs focused on this tenant type, but also the slowest growth rate. That said, with long management tenure and a nearly 15-year weighted average debt maturity, NNN is also one of the most conservatively run REITs on the market. Hence the 32-year dividend growth streak.
9. Federal Realty Investment Trust. Coastal retail and mixed-use landlord FRT boasts the longest dividend growth streak in REITdom at over 50 years. But after accumulating a large position in the company during the pandemic, I’ve become less sanguine about its growth prospects.
10. Crown Castle International. I am very sanguine about CCI’s growth prospects, as the major mobile carriers invest massively to roll out their 5G capabilities across CCI’s telecommunications infrastructure.
Planned Changes To Core Holdings
There’s a quote attributed to Leonardo da Vinci that goes, “Art is never finished, only abandoned.” I feel the same about my investment portfolio. It is never finished. There are always changes and touch-ups that can be made here and there.
Here are some of the changes I’m looking to make to my core holdings over time.
- Let FRT gradually drop off the top ten list.
I explained why I’ve become less sanguine about FRT in an article titled “Perennially Slow Growth Set To Continue.” FRT’s growth slowed even before the pandemic, slowed further during the pandemic, and will likely continue to be slow after it, albeit after a brief rebound. The REIT’s multifamily exposure is concentrated in San Francisco, Boston, and Washington DC, which have all experienced some of the least rent growth in the nation since the onset of COVID-19. And growth beyond 2022 of around 5% is unexciting for a REIT with a 19.5x FFO multiple and a 3.7% dividend yield.
- Let O gradually drop off the top ten list.
I argued that O’s growth rate would drop going forward because of the law of large numbers and the law of diminishing returns in this article, although that pessimism was tempered by the introduction of new hunting grounds for properties in Europe. As much as I respect O’s history of successful growth, I simply don’t believe the REIT will be able to exponentially increase acquisitions to the degree necessary to prevent its AFFO/share and dividend growth from gradually declining.
- Increase weighting in CCI.
CCI’s combination of telecommunications towers and small cells should continue to generate high-single-digit AFFO/share and dividend growth for CCI for the rest of the decade. And perhaps by the time 5G is completely rolled out, it will be time to begin installing equipment for 6G or nationwide Wi-Fi. I would rather err on the side of overestimating the growth of wireless technology than underestimating it.
- Increase weighting in CWEN.A.
I am not sure whether TTE’s new 50% stake in CWEN’s sponsor will benefit CWEN only a little bit or a lot, but I am convinced that it will be beneficial. CWEN’s management insists that the yieldco should be able to raise its dividend at the upper end of its 5-8% target range through at least 2026. After selling their thermal generation plants, CWEN has zero need to issue equity for the next few years and hundreds of millions of dollars still available for new investments. The new partnership with TTE might just provide CWEN with those new investment opportunities.
I consider CWEN.A (the share class I own) the only “buy today” among my top ten holdings.
- Build MAIN into a core holding.
As I wrote in “These 2 Reliable Compounders Make Great Core Holdings”:
MAIN is arguably the highest quality, bluest blue-chip business development company (“BDC”) on the market. The company’s business model is to provide mostly debt and some equity capital to private, lower-middle-market companies that are otherwise bank-dependent for the purpose of acquisitions, recapitalizations, or leveraged buyouts.
MAIN almost always trades at a significant premium to NAV, and it does not bother me to buy it at a premium. It is a high-yield (~6.8% yield) stock with a steadily growing dividend. I’m an income growth investor. Buying MAIN near a 7% yield is a no-brainer for me, and that’s exactly what I’ve been doing.
- Build MAA into a core holding.
Sunbelt multifamily landlord MAA has long been a sleepy, steady grower. But during and in the wake of COVID-19, MAA’s diversified portfolio of Class A/Class B and urban/suburban apartments could scarcely be better positioned for high organic rent growth. I believe population and job growth will continue to be faster than the national average going forward, while apartment supply won’t be able to keep up. Ipso facto: above-average rent growth.
MAA’s dividend growth may not continue to be as high as the most recent 15% raise, but I do believe it will be elevated – likely in the double-digits for the next few years.
MAA’s BBB+ credit rating is on positive watch at all three major ratings agencies and likely to turn into an A- rating at some point, awarding the REIT an even lower cost of capital with which to pursue acquisitions and ground-up developments.
It feels presumptuous to believe other investors, each with their own investment preferences and financial goals, would read with interest about my own portfolio choices or thinking. And yet, I always find it helpful and interesting to read other investors’ thought processes behind their portfolio choices, especially when it comes to core holding selection.
Sometimes reading other investors’ thoughts on portfolio construction is helpful to me by demonstrating what I don’t want to do with my own. Disagreeing with others’ choices sometimes helps me elucidate and clarify my own instinctive investment preferences. It brings logic and deliberation to the previously tacit and impulsive.
Hopefully this article is helpful to you, dear reader, in thinking through your own portfolio construction, whether your thinking is in agreement or disagreement with my own.